FAQ: Linking the Australian and European Union emissions trading systems

What is linking?

A link between emissions trading systems enables participants in one system to use units from another system for compliance purposes. Linking emissions trading systems provides a number of benefits including reducing the cost of cutting carbon pollution, increasing market liquidity and supporting global cooperation on climate change.

The Australian Government and the European Commission intend to link Australia’s emissions trading scheme (Australian scheme) and the European Union Emissions Trading System (EU ETS) through a partial link initially, followed by a full two-way link.

What is included in the linking arrangement between Australia and the European Commission?

The arrangement includes the European Commission seeking a mandate to negotiate a treaty on behalf of the European Union by mid-2015 for the full linking of the emission trading systems from July 2018 (the Australian Government has an existing mandate to negotiate a treaty). As an interim arrangement, a partial link will be established to allow Australian businesses to buy and use European Union Emissions Allowances (European allowances) for compliance under the Australian scheme from July 2015, until the full link comes into effect no later than July 2018.

To facilitate these arrangements and simplify the path towards full linking arrangements, the Australian Government will not proceed with the implementation of its price floor and will limit the use of Kyoto Protocol eligible international units1 under the Australian scheme. In addition, Australia will set its price ceiling with reference to the expected 2015-16 price of European allowances.

Why link the Australian and European systems?

Linking the Australian and EU systems benefits both parties and provides an example of how, through international cooperation and the use of markets, countries can work together to reduce carbon pollution.

The arrangement represents the first step towards linking the established carbon market in Europe with developing carbon markets in the Asia Pacific. Together, the linked Australian and European emissions trading systems will be the world’s largest carbon market and a major driver of the global transition to a low carbon economy.

Linking will provide business with access to more and lower cost emissions abatement units through a well developed, highly liquid carbon market. As Australia is expected to be a net importer of international units, linking with the EU ETS will provide Australian businesses with enhanced access to international units for use from July 2015. Linking will also provide European market participants with enhanced business opportunities.

By connecting markets that would otherwise be isolated, linking will create a more liquid carbon market that reduces carbon pollution at a lower cost. A more liquid carbon market will offer a more stable carbon price signal. It also provides businesses with more opportunities to trade, as businesses with excess units will have access to more buyers and businesses that need more units can purchase them from a wider range of sellers.

What does a partial link between the Australian and European systems mean?

A partial link between the Australian and European systems is an interim step towards a full link no later than July 2018. Under a partial link, Australian businesses will be able to use European allowances to meet up to 50 per cent of their liabilities under the Australian scheme from the commencement of the flexible price period in July 2015. This will ensure that Australian businesses have access to a broader range of credible, low-cost abatement. The Australian emissions trading system will be in its initial stages and this will provide access to credits from a more established market to allow smoother introduction of emissions trading in Australia.

What will a full link between the Australian and European systems mean?

A full link will further integrate Australian and European carbon markets by allowing businesses to use carbon units from Australia or Europe for compliance under either system. The European Commission and Australia have identified a number of policy matters to be considered before full linking is established including:

measurement, reporting and verification arrangements;

the types and quantities of third party units that can be accepted into either system;

the role of land-based domestic offsets from Australia’s Carbon Farming Initiative in the linked system;

any implications for supporting the competitiveness of European and Australian industries, in particular for sectors exposed to a risk of carbon leakage; and

comparable market oversight arrangements.

The Australian Government and the European Commission are progressing work on a full link as a key priority. It is envisaged that a full link will be agreed by mid-2015 and begin operation no later than July 2018.

Why are Australia and the EU proceeding with a partial link rather than a full link from 2015?

Work on a full link between the two systems will continue in parallel with the implementation of the partial link. However, recognising the complexities of moving to a full link in such a short period of time, the EU and Australia will proceed with a partial link as a first step while negotiations on full linking progress.

Can European businesses use Australian carbon units in the EU ETS?

European installations will be able to use Australian units for compliance as soon as full linking comes into operation, from July 2018 at the latest.

When and how can Australian liable entities use European allowances for compliance under the Australian scheme?

Australian liable entities (businesses covered by the Australian scheme) will be able to use European allowances to assist them in meeting their obligations from 1 July 2015 when the flexible price period begins. In parallel to initiating negotiations on a full link, the Australian Government and the European Commission are working to finalise technical details of the interim link to be agreed by mid-2013 to allow European allowances to be held in the Australian registry. Until then, Australian liable entities can open registry accounts in the EU and purchase European allowances for future compliance under the Australian scheme.

What does linking mean for Australian businesses’ access to international units?

Linking will provide Australian businesses with secure access to a broader pool of international emissions units. European allowances will be added as an eligible international unit that can be used in the Australian scheme and Australian businesses will be able to use eligible international units for up to 50 per cent of their total liability until 2020.

To facilitate the negotiation of a full link, the Australian Government is removing the price floor, as well as introducing an additional sub-limit on the use of Kyoto Protocol eligible international units such that firms will be able to use these units to meet up to 12.5 per cent of their annual liabilities within the 50 per cent overall limit on the use of eligible international units. This limit will ensure that the link operates effectively and provides long term price certainty for businesses investing in low emissions technologies.

Why is the Australian Government removing the price floor?

Removing the price floor will simplify the pathway towards full linking, and was an element of the linking package agreed between Australia and the European Commission. By connecting Australian and European carbon markets, linking will ensure a single price for Australian and European carbon units. This provides investors with long term certainty on the price of carbon pollution, which largely removes the need for a price floor in the flexible price period.